Category: Cost Analysis

Turnover is not yet profit and gross amounts are not the same as net revenues. But don’t worry! Read here how to make the correct calculations for your administration.

How do I calculate my turnover?

The moment you book your very first turnover is of course fantastic. Finally, your hard work is paying off. Your turnover over a certain period is the sum of everything you have brought in in revenues.

VAT is not included here, because you calculate VAT on turnover. After all, it’s the sales tax. There are three different rates

  • The standard rate: 21%
  • The reduced rate: 9%
  • The exempt rate: 0%

How do I calculate my profit?

Turnover is not the same as profit. After all, you still incurred costs. To calculate the profit over a period of time, you have to subtract the cost from the turnover. Then you are left with what you have to spend at the bottom of the line.

Gross profit, operating profit and net profit

There is a difference between gross profit, your operating result from ordinary business operations and the net profit.

  1. The gross profit only takes into account the direct costs you incur for an assignment.
  2. The operating result from your normal business operations also takes indirect costs into account. These are costs that are not related to your production process, they are often referred to as overhead.
  3. The net profit also takes into account taxes, interest and dividend for preference shares.

In short, the net profit is what you are left at the very bottom of the line.

  • Also read:  My first time: VAT return and income tax

Calculation example: calculate turnover to profit

The calculation of turnover to profit seems simple, but sometimes goes wrong. This fictitious calculation example shows how to calculate the profit.

Laura is a construction entrepreneur, her business covers thatched roofs and she employs three people. Covering one roof takes about a month. She rents an office with a space for storage.

 

  • Laura has spent approximately € 35,000 on materials, tools and personnel costs (direct costs).
  • Laura charges the customer a price of € 50,000 including VAT
  • The turnover is the price that the customer pays, excluding VAT (21%).

Turnover = € 50,000 / 121 * 100 = € 41,322

  • The gross profit is the turnover minus the direct costs incurred by Laura for this job.

Gross profit = € 41,322 – € 35,000 = € 6,322

  • The operating result from ordinary business operations is the gross profit minus the indirect costs (rent of the building, administration costs, depreciation, etc.).

Operating result from ordinary operations = € 6,322 – € 1,200 = € 5,122

  • Net profit is the operating result from ordinary activities less taxes, interest and dividend for preference shares.

Net profit = € 5,122 – € 500 = € 4,622.

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To manage a sufficiently profitable and performing commercial activity in a competitive company like the one we are all part of, it is advisable to periodically carry out those analyzes of company costs which, in addition to giving a clear overview of the current economic situation, also help to identify the source of any waste allowing it to be reduced as quickly as possible.

For this cost control to guarantee good results in the short and long term, however, it is necessary to take into consideration a series of specific directives which we will immediately discuss below: important operations to be carried out carefully to have full control over the progress financial position of your company.

Identify all expenses

A good analysis of the company costs primarily involves the precise identification of all the expenses incurred during a certain period (one year, two years, five years, etc.).

To obtain a correct estimate it is important to divide the management costs of the company that do not produce real profits (production, purchase, financing, sales, marketing, research, development, etc.), the fixed costs (personnel, raw materials, IT equipment, etc.) and the costs on which it is possible to save (supply contracts, rents, etc.).

Set specific goals

After the assessment and control of the costs described in the previous point, it is then necessary to understand how much and where you can save, considering the different company departments and proceeding for specific objectives: if, for example, you realize that the Being operational in a certain region is the cause of excessive economic expenditure, resources must be directed to the most profitable areas, concentrating them in such a way as to reduce waste and increase profits.

Contact employees and collaborators

To ensure that the analysis of company costs is as truthful and reliable as possible, it is also necessary to ask for an opinion from those employees and collaborators engaged every day in the business activities. Since all the pawns available live in direct contact with the reality of the company in which they work, they can certainly make an important contribution to eliminate any loss of time and/or money.

Identify savings possibilities

When the main purpose is to limit exits, a valid solution to put into practice is to identify all the costs on which it is possible to save: regardless of whether it is wrong expenses, missing discounts or other wastes, it is necessary to find alternatives to reduce the economic effort.

Get software to record and analyze costs

Whoever the person appointed to control the costs, the first thing he will need will be the objective data: that is, the list of all the costs incurred and perhaps supported by a supporting piece (receipts, invoices, etc.).

A spreadsheet can be useful if the check is done one time, and the complexity of the activity is modest. In most cases, on the other hand, continuous cost control is necessary, and therefore it is advisable to rely on management software with a first note in which to record and categorize movements as needed.

Hire a consultant

In order to carry out a precise and scrupulous cost control, at times, it may become necessary to hire a consultant specialized in the matter which, in addition to making available to the company its baggage of knowledge, provides an objective point of view and free from corporate interests.

If the selection of this figure is to be made considering his past experiences (where and for whom he has worked in the past) and the methods of collaboration will be made official, clearly accompanied by a confidentiality agreement.

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